The Tax Code Isn’t Working for America
Regardless of today’s election outcome, here’s an encouraging headline buried deep on Page C 8 of this morning’s Wall Street Journal: ”Tax Relief Is Likely No Matter Who Wins.”
As we at CFIF have long emphasized, the U.S. continues to suffer the developed world’s highest corporate tax rate. In addition to suffocating domestic growth and imposing needless tax complexity on American businesses, our outdated corporate tax code also explains why corporations are forced to relocate headquarters overseas in order to survive in an increasingly competitive global marketplace. Speaker Paul Ryan has unsurprisingly offered admirable intellectual and political leadership in promoting reform, and the good news is that oven liberals like Barack Obama understand the need for cutting rates and reducing complexity.
Accordingly, it’s refreshing regardless of one’s political leanings to read the Journal’s take:
No matter the outcome of Tuesday’s election, American companies with substantial overseas earnings, and their investors, could emerge as big winners. Corporate tax reform that would make it easier for U.S. firms to repatriate foreign earnings has emerged as a rare issue of bipartisan consensus in Washington. Progress on this issue is possible no matter who controls the White House and Congress next year… Under current law, American companies with overseas earnings pay no U.S. federal tax on these profits unless and until they repatriate the money, at which time they pay the relatively high corporate tax rate of 35%. This creates a perverse incentive for U.S. companies to house money abroad rather than reinvest it at home…
Even in a divided-government scenario, for example, with Mrs. Clinton as President and a Republican-controlled Congress, it seems likely that companies can look forward to a one-time break on repatriated earnings and a lower tax rate going forward.”
And as the Journal notes, the positive effect would likely be substantial:
The last time there was such a repatriation tax holiday was in a law passed in 2004, and the effects were dramatic. Companies brought home $299 billion of overseas earnings in 2005, up from $82 billion the previous year, according to the Bureau of Economic Analysis.”
Far preferable to a mere one-time repatriation tax holiday would be a permanent reduction in the corporate tax rate below the developed worldwide average around 20%, and removal of Byzantine complexity. Regardless, the likelihood of tax reform whoever wins tonight offers welcome news as an oftentimes bleak election concludes.
Tonight, millions of Americans will tune into the final Presidential debate between Donald Trump and Hillary Clinton. Among the central topics should be the economy, which recent polling shows remains voters’ foremost concern.
Unfortunately, voters haven’t heard enough from either candidate on that topic during the first two debates.
Which is tragic, because this election itself has taken a toll on the economy. According to a recent poll of economists, rhetoric from both campaigns has had a negative impact on economic growth over the past few months. Accordingly, rather than continuing to argue about personal issues and mutual animosities, both candidates must do a better job of improving economic optimism and confidence by advocating pro-growth policies that will help us proper.
And in that vein, perhaps no issue merits focus more than comprehensive tax reform.
During the first debate, taxes and potential plans received brief discussion. Both candidates agreed that a significant problem exists with companies moving to other countries and protecting their earnings abroad from excessive U.S. taxes. Trump correctly pointed out that the reason many companies leave is that our corporate rate remains the highest in the developed world. Indeed, a recent Mercatus Center study highlighted how the increasing number of corporate inversions result from that inglorious distinction, and how lowering the rate will go a long way toward keeping American companies here so that they can create jobs and generate tax revenues domestically rather than abroad.
But more discussion and detail is critical. Over thirty years ago, on September 26, 1986, the Senate began debate over comprehensive tax reform legislation that the House of Representatives had approved. Incredibly, our tax code has not been reformed in a meaningful manner during the ensuing 30 years despite tectonic evolution of the U.S. economy during that time period. It’s therefore past time to modernize the code and reformed so as to help American businesses of all sizes, rather than continuing to hinder growth and opportunity.
And on that point, we need concrete plans from Mr. Trump and Secretary Clinton.
Demonstrating his own commendable leadership on this critical matter, Speaker of the House Paul Ryan recently stated that tax reform is his top priority in 2017. He rightly explained that the first thing that needs to be accomplished next year is “a budget that gets tax reform, that gets this debt and deficit under control.” Clearly, Speaker Ryan realizes that the American people welcome discussion about how the federal government can actually enact policies beneficial to the economy and their own individual finances. Whoever enters the White House this coming January must work with Congress to reform our tax code as soon as possible, which is precisely why we need to hear their ideas on how to best accomplish that.
To his credit, Trump has proposed a tax reduction for all businesses from 35 percent to 15 percent. And to her credit, Clinton acknowledges that lowering the corporate rate would encourage companies to repatriate funds stranded overseas. That’s obviously a step in the right direction, but the American people need to hear more specifics – a simplified code and lower rate, in particular – and a timeline for when they plan to enact that type of reform. While their rhetoric on the issue is occasionally encouraging, voters must learn which candidate will work to fix the tax code in order to improve our economy the fastest.
This election has obviously been among the most contentious in our nation’s history, and policy has too often taken a back seat to personality. While that may at times provide shallow entertainment, it’s time to put the personal attacks aside and hear more about both candidates’ visions for the economy. Hopefully, that will mean devoting more time toward discussing tax reform and economic growth, not bickering over issues that ultimately has little impact on Americans’ everyday lives and needs.
Inexplicably, the U.S. stubbornly maintains the developed world’s highest corporate tax rate. We also hold the inglorious distinction of taxing income earned overseas a second time, even after taxes were already paid in the nations where it was earned. Obviously, that only incentivize businesses to leave America for more hospitable foreign shores and take jobs with them.
A simple illustration courtesy of The Wall Street Journal drives home the point:
The U.S. system of worldwide taxation means that a company that moves from Dublin, Ohio to Dublin, Ireland, will pay a rate that is less than a third of America’s. A dollar of profit earned on the Emerald Isle by an Irish-based company becomes 87.5 cents after taxes, which it can then invest in Ireland or the U.S. or somewhere else. But if the company stays in Ohio and makes the same buck in Ireland, the after-tax return drops to 65 cents or less if the money is invested in America.”
When people wonder why over seven years of economic “recovery” doesn’t feel like a recovery at all, this is a leading reason. Our unsustainably high rate and double-taxation regime is simply unacceptable, but the good news is that the coalition favoring reform is bipartisan. That’s an encouraging sign regardless of who wins in November, but it’s time to finally get this done before even more businesses and jobs move overseas.
In an op-ed published yesterday in The Hill, CFIF’s Timothy Lee explains why President Obama and the Treasury Department are wrong on corporate tax inversions and the only way to prevent them is to enact comprehensive tax reform now.
The simple reality is that our corporate tax rate of 35% – the highest among OECD nations – jeopardizes every domestic corporation’s very survival in an increasingly competitive global economy. Moreover, because public corporations remain under a legal fiduciary duty to their shareholders to run the most efficient operation possible, America’s unsustainably high tax rate leaves them with little choice but to explore inversion opportunities.
Tragically, even President Obama understands that reality. On several occasions, he has called for comprehensive tax reform that included lowering the corporate tax rate to a more globally competitive level. It defies logic and experience that the president called for lower tax rates out of some sentimental affection toward American corporations. Rather, he clearly understands that cutting America’s corporate tax rate allows domestic businesses a better chance of growing and competing on the international stage.
To remedy the situation, Congress must take concrete steps towards comprehensive tax reform now…There is still enough time in 2016 to achieve a deal.
Amid Barack Obama’s latest campaign to increase taxes, Gallup offers some welcome news this morning. Specifically, Americans’ satisfaction with the amount we pay in federal taxes has now fallen to a 12-year low:
Americans’ satisfaction with the amount that Americans pay in federal income taxes roughly ties the lowest percentage Gallup has seen in the past 12 years… According to the January 5-8 poll, 63% of Americans this year are dissatisfied with the amount Americans pay in taxes. In a follow-up question, most of this group – equivalent to 46% of all Americans – say they would like to see Americans pay less in taxes. Hardly any – 4% – would prefer that they pay more. An additional 13% are dissatisfied with what Americans pay in taxes, but aren’t specific about how it should change. The 46% who currently want taxes decreased is notably higher than what Gallup has found since 2012.”
Moreover, the latest survey confirms Obama’s trademark reverse-Midas touch, as his desire to raise taxes appears to have only backfired:
Six years into Barack Obama’s presidency, public satisfaction with taxes is at a low ebb, and nearly half of all Americans are dissatisfied and would like to see the amount people pay decreased.”
Accordingly, conservatives and libertarians continue to win the war of ideas in this regard. It’s now a matter of the new Congress internalizing public opinion, and putting a quick halt to Obama’s scheme.
Sounds like no one prepped President Barack Obama for the obvious question posed by ABC’s George Stephanopolous: “How do you respond to the argument, a future president comes in and wants to lower taxes. Doesn’t happen. Congress won’t do it; so he says ‘I’m not going to prosecute those who don’t pay capital gains tax.’”
After dithering a bit, Obama replied with, “The vast majority of folks understand that they need to pay taxes, and when we conduct an audit, for example, we are selecting those folks who are most likely to be cheating. We’re not going after millions and millions of people who everybody knows are here and were taking advantage of low wages as they’re mowing lawns or cleaning out bedpans, and looking the other way.”
Stephanopolous pressed harder. “So you don’t think it’d be legitimate for a future president to make that argument?”
Without a hint of irony, Obama says, “With respect to taxes? Absolutely not.”
And yet the president has no reason in principle for limiting his successors in office from willfully disregarding whatever laws they don’t like. The former constitutional law professor seems to be completely unaware of the precedent he is setting by unilaterally suspending immigration enforcement. If left unrebuked, this action will teach future Oval Office occupants that the rule of law can – and at times should – be replaced with the whim of one.
The only saving grace in this interview is that the President of the United States seems genuinely clueless as to the logic of his own order. Such is the state of the chief executive.
Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.
View more of Michael Ramirez’s cartoons on CFIF’s website here.
Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.
View more of Michael Ramirez’s cartoons on CFIF’s website here.
In this week’s Freedom Minute, CFIF’s Renee Giachino explains how a pending lawsuit challenging certain ObamaCare IRS subsidies not explicitly authorized in the Affordable Care Act could doom the entire health care law.
CFIF’s Renee Giachino explains how President Obama’s push for higher taxes, bigger government and expanded welfare programs is the wrong approach to help the greatest number of people climb the economic ladder.
In today’s Wall Street Journal, former Japanese Diet member Mieko Nakabayashi and former U.S. Deputy Assistant Secretary of the Treasury James Carter spell out in stark terms the need for reform and reduction of U.S. corporate taxes, which are now the highest in the industrialized world. In particular, they highlight the alarming exodus of large corporations from America to more hospitable tax regimes with this statistic:
When the U.S. last cut its corporate tax rate in 1986, 218 of the world’s 500 largest corporations measured by revenue were in the U.S. Today, that number is 137. Similarly, the number of Japanese corporations in the Fortune Global 500 fell to 68 last year from 81 in 2005. While there is no single explanation for the drop, Tax Foundation chief economist William McBride tells us: ‘The common thread behind all of this is the U.S. corporate tax, which is the most punitive in the developed world.’”
We live in a period of unprecedented political polarization. The need to reduce our corporate rate, however, has achieved bipartisan agreement, with Barack Obama himself proclaiming, “Our corporate tax rate is too high.” Accordingly, the time is now to enact reduction and reform, lest America’s legacy of economic leadership deteriorate further.
In this week’s “Freedom Minute,” CFIF’s Renee Giachino discusses how, in the midst of scandals surrounding Benghazi, the IRS and DOJ conducting surveillance on the media, Congress recently decided to scrutinize an iconic American company “for failing to pay taxes that it didn’t owe.”
Giachino points to this latest lunacy as further evidence supporting the need for corporate tax reform that includes lower rates to bring more business back to the United States, create more jobs and generate more revenue for the treasury.
In this week’s Freedom Minute, CFIF’s Renee Giachino discusses the president’s budget proposal and how its calls for even higher taxes, higher spending, bigger government and more empty promises will do nothing to get us out of the Obama recession.
Earlier this month, we at CFIF lamented the fact that the U.S. now claims the developed world’s highest corporate tax rate. Fortunately, as we noted, a bipartisan consensus is emerging in favor of reducing and reforming that rate.
Now, in a letter published by The Economist, twenty leading economists from both academia and the private sector called for a lower rate and illustrated how our current rate discourages employment and thwarts domestic investment:
A high corporate tax rate impairs our ability to attract domestic and foreign investment. Because capital and information flows more freely across borders in the Internet age, disparities in the corporate income tax rate can now have a greater impact on location decisions than in the past. The number of Fortune Global 500 headquarters in the United States decreased from 179 to 133 from 2000 to 2011, while China (25.0 percent tax rate), Switzerland (21.2 percent tax rate), and Korea (24.3 percent tax rate) experienced sizable increases over the same period. De Mooij and Ederveen (2005) found that a one percentage point reduction in a host country’s tax rate increased foreign direct investment by 2.9 percent. The OECD (2011) found that corporate income taxes, of all the different types of taxes, are most harmful to economic growth and capital accumulation.
A high corporate tax rate undermines job creation and reduces wages. According to the Commerce Department, foreign investment supported five million U.S. jobs in 2010. To the extent that our relatively high corporate tax rate discourages foreign investment, it discourages job formation. Moreover, several academic studies have found that much of the burden of the corporate income tax is borne not by capital but by domestic labor, in the form of lower wages. For example, Mathur and Hassett (2010) analyze the relationship between corporate tax rates and the average manufacturing wage for 65 countries over a period spanning 1981–2005; they estimate that a one percent increase in the corporate income tax leads to a one half of one percent decrease in hourly wages. The U.S. Treasury Department assumes that 25 percent of the incidence of corporate tax is borne by workers. Moreover, policies that increase the cost of capital will result in less capital being invested.”
As summarized by former Clinton Administration adviser Elaine Kamark and former Reagan adviser James Pinkerton, “This is another confirmation of the growing consensus among experts and political leaders that the U.S. corporate tax rate is too high and the code too complex.” They added, “As the experts have established, the current U.S. tax code is an impediment to investment, growth and job creation.”
The intellectual consensus thus continues to coalesce. Now it’s time for the White House and Congress to act before more harm is done.
As usual, Ezra Klein’s Wonkblog has an interesting series of graphs that show the power of the federal government in granular detail. Today’s installment, courtesy of the White House, provides a state-by-state assessment of how the coming budget sequester will impact a range of federally-funded, state-run programs.
These include popular spending on initiatives such as teachers and schools, work-study jobs, Head Start, job-search assistance, military readiness, law enforcement, child care, vaccines for children, public health, nutrition assistance for seniors, STOP Violence Against Women Program, and clean air and water.
But while the White House is putting out these details to (ostensibly) convince the public that 10 percent across-the-board cuts in discretionary spending will be devastating to popular programs, there’s also a bit of subtle public shaming thrown in as well. Reading through the graphs it becomes painfully obvious just how much of modern American life is subsidized by federal tax dollars (and in some cases, also supported by state taxes). Getting confronted with that reality isn’t comfortable; especially when many people have come to rely on this kind of help.
And yet, something has to change. We simply can’t raise enough taxes to cover the cost of every liberal social experiment, or even to pay for every good idea. Instead, we as a country need political and other leaders to think carefully about how to modify the social contract we’ve been under since the New Deal so that the generations to come will not be cheated out of their inheritance.
Much like how they react to any reasonable reform ideas to Medicare (see any number of ‘Medi-scare’ tactics), liberals can’t lead on this modification project because they refuse to acknowledge that America has a spending problem in the first place. It thus falls to conservatives to improve on what we have, preserving what’s good and making it better.
Part of the reason I’m optimistic about the future is that I don’t believe that details about our nation’s financial problems will shame a majority of citizens into zero-sum taxation. Rather, I think that once people become aware of how overextended is our current welfare state, they will reward politicians who can show how to scale back the public sector so that the private sector can flourish.
At the risk of being accused of celebrating a bad deal rather than merely arguing that it wasn’t as bad as some conservatives say(I am doing the latter, not the former), I hereby jump into the fray again to request a little logical consistency from fellow conservatives.
Imagine a scenario the direct converse of what just occurred this week.
Imagine that years ago Congress had passed a “temporary” tax hike to pay for a war and its aftermath. Imagine that the hike was scheduled to expire at 12:01 a.m. on a certain New Year’s Day. In other words, by law, taxes would drop on every American on Jan. 1 if Congress didn’t act.
Now, what if Congress suddenly decided it couldn’t “afford” to “lose” those revenues. So it began working to block the expiration of those higher rates.
Regardless of whether Congress acted on Dec. 30 (before the expiration of the higher rates) or on Jan. 1 or 2 (after the expiration), there is not a conservative on Earth who would argue that Congress was doing anything other than raising taxes if Congress indeed intervened. And if Congress had intervened to block the scheduled rate reduction for 99% of Americans, while allowing the lower rates to apply to 1%, there is not a conservative alive who would be celebrating the reprieve for the 1% rather than denouncing Congress for keeping the current rates for the 99%.
In that scenario, every conservative would treat the already-scheduled-by-law rate reduction as the baseline, and any change in that schedule as the intervention.
So why, if the situation is reversed, do conservatives yell that Congress “raised” taxes by acting to avert a scheduled tax hike for 99% of Americans? Why is it that the already-scheduled-by-law rate increase is treated as if it is the intervention, while the change in that schedule, in order to save lower rates for 99%, is treated as the baseline?
The point is that consistency should be required. Deciding whether something is a tax “hike” or a tax “cut” should not be a changeable proposition depending on the political circumstances. Either the law as written is the baseline, or it isn’t. You can’t say that in one case the law as written is the baseline, while in another case the existing rate structure is the baseline no matter what the law says is supposed to happen to that baseline.
Conservatives have every reason to grumble that President Obama refused to act to protect the final 1% (or whatever the exact number is) of Americans from higher taxes. But it is just not fair to blame Republican leaders for failing to act when they indeed already had acted months ago but the Senate and president refused to go along. Yes, yes, there were all sorts of different strategies and tactics that might have achieved better results (from a conservative standpoint) than were actually achieved, but that doesn’t mean that congressional Republicans are guilty of hiking taxes when they strove so mightily (even if ineffectually) to avoid raising even a single dollar of taxes.
The law as written is a mighty powerful instrument. President Obama had the law as written on his side, combined with the media, combined with the polls, combined with the political momentum of a very large electoral victory. For Republican leaders to fail to overcome the law, the media, the polls, and the political momentum might represent a lack of skill, but it is hardly a betrayal of principle. All that is at issue are small degrees of difference as to what was achievable as the best, or least bad, outcome from a very difficult situation. When a party controls only one half of one of the two “political” branches of government, and when the party controlling one-and-a half out of two (including the most powerful one) also has existing law (requiring higher rates as of Jan. 1) on its side, then the first party does not have one heck of a lot of leverage.
Do I think anybody else could have achieved a better outcome than John Boehner achieved? Yes, slightly. But was the final outcome an utter catastrophe, compared to what would have happened if nobody acted at all? Not in the least, as I have explained in other blog posts and columns. And there is something to be said for Boehner’s dogged attempts to avert catastrophe, and certainly something to be said for a result that saved married couples from higher tax rates for another $200,000 in earnings while for the first time inflation-indexing a very large exemption from the death tax.
By contrast, moving forward, the leverage is almost all in favor of conservative goals. Whereas in this week’s deal the alternative of failing to act would have meant a horrible outcome (tax-rate hikes for 100% of Americans), there now remains not a clause in current law that will force any more taxes to rise if Congress fails to act. But if Congress fails to act at all — if it does nothing — then conservative wishes for lower spending will indeed occur. On both taxes and spending, the leverage of doing nothing — and thus of allowing the law as written to proceed — is now in conservative hands.
What remains is for Republicans and conservatives to revamp their strategy, tactics and communications, so they come out better in political terms than they emerged from this fight. The first step needs to be to stop cannibalizing our own side and instead aim fire at the leftist president — and to start by focusing attention on the unpopular$1 trillion in taxes that just went into effect from the unpopular next phase of implementation of the unpopular ObamaCare law.
It’s time to stop bemoaning the past, and to start working to improve the next battles that will be upon us in very, very short order.
…despite all of the dramatic hyperbole about the “fiscal cliff,” it’s important to remember that going over the fiscal cliff will reduce the budget deficit by $503 billion in 2013, and $682 billion in 2014, relative to the “solutions” being bandied about on Capitol Hill.
Moreover, since President Barack Obama and his fellow liberals in Congress refuse to link tax increases with entitlement reform, perhaps it’s better to go over the fiscal cliff than accede to some tax increases and no reforms. At least then Obama & Co. would own the tax-and-spending system their intransigence created.
Stuart Rothenberg perfectly articulates the difficult post-election position of fiscal conservatives:
Republicans may well be correct that the nation’s biggest problem is that “the government spends too much, not that it taxes too little,” but at some point political realities rather than ideological beliefs or past party dogma ought to guide both party leaders and members of its rank and file.
The Roll Call columnist also shows just how much Beltway logic drives his analysis. If Republicans are right that “the government spends too much, not that it taxes too little,” then Republicans are justified in pushing for reduced spending and resisting tax increases. And, if Republicans are right, then President Barack Obama and his fellow liberals are wrong to demand the opposite.
That’s not ideology, just math and common sense. Political calculations may end up trumping both eventually, but that doesn’t mean that fiscal conservatives within the Republican Party are wrong as a matter of logic from defending their position.